IRS reclassification program: more questions than answers

Under the IRS’ Voluntary Classification Settlement Program (VCSP), you may change workers’ status from independent contractors to employees for future tax periods on favorable tax terms, without in­­curring penalties or interest. When the VCSP was introduced a few months ago, a primary concern was how it would affect employers’ liability for unpaid overtime.

Now, however, new questions have arisen. Unfortunately, there are no easy answers.

What’s an “audit?” You can’t participate in the VCSP if you are currently undergoing a worker classification audit by the IRS, the U.S. Department of Labor (DOL) or a state agency.

Issue: What counts as an audit at the state level? Would you be considered under an audit, for example, if a state unemployment agency’s investigation leads to the conclusion that your independent contractors should be reclassified as employees who were entitled to unemployment benefits? Even if the initial answer is no, the state’s interest could be piqued, which could lead to a full-blown worker classification audit.

Six-year statute of limitations. As part of the VCSP closing agreement with the IRS, for the first three years of participation, you must agree to a special six-year statute of limitations, instead of the usual three-year limit. Questions have been raised regarding what that six-year statute of limitations applies to—an employer’s general payroll liability or only VCSP-related payroll liabilities.

According to IRS official Paul Carlino (IRS Office of Associate Chief Counsel), the IRS doesn’t intend to apply the six-year limit to employers’ general payroll liability, but it’s leaving the door open to doing so. Bottom line: If the VCSP is an option for you, review at least six years of payroll records and ensure that all deposits were timely made, all returns were timely filed and all discrepancies were resolved in a timely fashion.